National Conference on“Management of Resources – Issues & Challenges”

“SUPPLY CHAIN MANAGEMENT OF WAL-MART

– A CASE STUDY ANALYSIS”

AUTHORS DETAILS

Dr.Lalitha Balakrishnan

Vice Principal & Professor,

M.O.P.Vaishnav College for Women (Autonomous),

Chennai – 600034

Ms. Nisha.U

Research Scholar,

Department of Commerce,

M.O.P.Vaishnav College for Women (Autonomous),

Chennai – 600034

Ph – 9840096372

Email id – nishaudayshankar@yahoo.co.in

Ms. Divya.K

Assistant Professor,

Department of Commerce,

M.O.P.Vaishnav College for Women (Autonomous),

Chennai – 600034

Ph – 9962554953

Email id – divya_krishnakumar@yahoo.com

DECLARATION

We, Dr.Lalitha Balakrishnan, Nisha.U and Divya.K authors of the paper, “Supply chain

management of Wal-Mart – A case study analysis” certify that this paper is our original work

and has not been published elsewhere.

Station: Chennai

Date: 09.01.2011

Dr.Lalitha Balakrishnan,

Nisha.U

&

Divya.K

ABSTRACT

The case examines the supply chain management practices at Wal-Mart, the leading

retailer in the world. The case explains in detail how Wal-Mart managed various components of

the supply chain including procurement, distribution, logistics and inventory management. It

covers how the use of innovative IT tools has helped the company in improving the efficiency of

supply chain. The case concludes with a discussion on the benefits reaped by Wal-Mart due to its

efficient and effective supply chain management system.

Understand the importance of an efficient distribution and logistics management system

in not only reducing the costs for a retailing company but also in creating value for the customers

KEY WORDS: Supply chain management, Wal-Mart, retailer, procurement, distribution,

logistics, inventory management

INTRODUCTION

A supply chain is a network of facilities and distribution options that performs the

functions of procurement of materials, transformation of these materials into intermediate and

finished products, and the distribution of these finished products to customers. Supply chains

exist in both service and manufacturing organizations, although the complexity of the chain may

vary greatly from industry to industry and firm to firm. Keeping this in mind Sam Walton, the

founder of Wal-Mart had always focused on improving sales, constantly reducing costs, adopting

efficient distribution and logistics management systems and using innovative information

technology (IT) tools.

By 1969, Walton had established 18 Wal-Mart stores. By late 1970s, the retail chain

had established a pharmacy and an auto service center. In 1980s, Wal-Mart continued to grow

due to huge customer demands in small towns. In 2002, Wal-Mart operated more than 3,500

discount stores, Sam's Clubs and Supercenters in the US and more than 1,170 stores in all major

countries across the world. Wal-Mart was one of the largest private sector employers in the

world, with employee strength of approximately 1.28 million. The phenomenal growth of Wal-

Mart is attributed to its continued focus on customer needs and reducing cost through efficient

supply chain management practices.

SUPPLY CHAIN MANAGEMENT PRACTICES OF WAL-MART

The various practices of supply chain management followed by Wal-Mart are discussed below:-

• HUB AND SPOKE SYSTEM

In the early 1970s, Wal-Mart became one of the first retailing companies in the world to

centralize its distribution system, pioneering the retail hub-and-spoke system. Under the system,

goods were centrally ordered, assembled at a massive warehouse, known as ‘distribution center’

(hub), from where they were dispatched to the individual stores (spoke). The hub and spoke

system enabled Wal-Mart to achieve significant cost advantages by the centralized purchasing of

goods in huge quantities and distributing them through its own logistics infrastructure to the

retail stores spread across the U.S.

• WAL-MART’S PROCUREMENT

Wal-Mart emphasized the need to reduce purchasing costs and offer the best price to the

customer. The company directly procured from manufacturers, by passing all intermediaries.

Wal-Mart finalizes a purchase deal only when it is fully confident that the products being bought

are not available elsewhere at a lower price. Wal-Mart spends a significant amount of time

meeting vendors and understanding their cost structure. By making the process transparent, the

retailer can be certain that the manufacturers are doing their best to cut down costs.

• USING EDI FOR PROCUREMENT

The computer systems of Wal-Mart were connected to those of its suppliers. EDI enabled

the suppliers to download purchase orders along with store-to-store sales information relating to

their products sold. On receiving information about the sales of various products, the suppliers

shipped the required goods to Wal-Mart’s distribution centers. An important feature of Wal-

Mart’s logistics infrastructure was its fast and responsive transportation system. The distribution

centers were serviced by more than 3500 company owned trucks. Wal-Mart believed that it

needed drivers who were committed and dedicated to customer service. The company hired only

experienced drivers who had driven more than 300,000 accident-free miles, with no major traffic

violation.

• CROSS-DOCKING

To make its distribution process more efficient, Wal-Mart also made use of a logistics

technique called “cross-docking.” In this system, the finished goods were directly picked up

from the manufacturing plant, sorted out and then directly supplied to the customers. The system

reduced the handling and storage of finished goods, virtually eliminating the role of the

distribution centers and stores. The manufacturer directly forwarded the goods to a place called

the “staging area.” The goods were packed here according to the orders received from different

stores and then directly sent to the respective customers.

• INVENTORY MANAGEMENT

Wal-Mart invested heavily in IT and communication systems to effectively track sales

and merchandise inventories in stores across the country. With the rapid expansion, it was

essential to have a good communication system. Hence, Wal-Mart set up its own satellite

communication system in 1983. Wal-Mart was able to reduce unproductive inventory by

allowing stores to manage their own stocks, reducing pack sizes across many product categories,

and timely price markdowns. Instead of cutting the inventory across the board, Wal-Mart made

full use of its IT capabilities to make more inventories available in the case of items that

customers wanted most, while reducing the overall inventory levels. Employees at the stores had

the “Magic Wand,” a hand-held computer which was linked to in-store terminals through a radio

frequency network.

These helped them to keep track of the inventory in stores, deliveries, and backup

merchandise in stock at the distribution centers. The order management and store replenishment

of goods were entirely executed with the help of computers through the Point-of-Sales (POS)

system. Through this system, it was possible to monitor and track the sales and merchandise

stock levels on the store shelves.

• VOICE-BASED ORDER FILLING (VOF)

In 1998, Wal-Mart installed a voice-based order filling (VOF) system in all its grocery

distribution centers. Each person responsible for order picking was provided with a

microphone/speaker headset, connected to the portable (VOF) system that could be worn on

waist belt. They were guided by the voice to item locations in the distribution centers.

The VOF system also verified quantities picked, and could respond to a variety of

requests such as providing product detail (type, price, barcode number, etc.) By installing the

VOF system, Wal-Mart eliminated mispicks and product labeling costs since the system did not

require paper lists and labels to be affixed on the goods. Since the floor area of any Wal-Mart

store varied between 40,000 to 200,000 square feet, movement of goods within the store was an

important part of logistics operations. Wal-Mart made significant investments in IT to quickly

locate and replenish goods at the stores.

• RETAIL LINK SYSTEM

In 1991, Wal-Mart had invested approximately $4 billion to build a retail link system.

More than 10,000 Wal-Mart retail suppliers used the retail link system to monitor the sales of

their goods at stores and replenish inventories. Details of daily transactions ($10 million per day)

were processed through this system. Retail Link connected Wal-Mart’s EDI network with an

extranet, accessible to Wal-Mart’s thousands of suppliers.

The suppliers could find out how their product was performing vis-a-vis competitors’

products in a particular product category. Wal-Mart owned the largest and most sophisticated

computer system in the private sector. The company used Massively Parallel Processor (MPP)

computer system to track the movement of goods and stock levels. All information related to

sales and inventories was passed on through an advanced satellite communication system.

• COLLABORATIVE PLANNING, FORECASTING AND REPLENISHMENT

(CPFR)

By the mid 1990s, Retail Link had emerged into an Internet-enabled SCM system whose

functions were not confined to inventory management alone, but also covered collaborative

planning, forecasting and replenishment (CPFR). In CPFR, Wal-Mart worked together with its

key suppliers on a real-time basis by using the Internet to jointly determine product-wise demand

forecast. CPFR is defined as a business practice for business partners to share forecasts and

results data through the Internet, in order to reduce inventory costs while at the same time,

enhancing product availability across the supply chain. Though CPFR was a promising supply

chain initiative aimed at a mutually beneficial collaboration between Wal-Mart and its suppliers,

its actual implementation required huge investments in time and money. A few suppliers with

whom Wal-Mart tried to implement CPFR complained that a significant amount of time had to

be spent on developing forecasts and analyzing sales data.

• VAN EDI VS WEB-EDI

In October 2002, Wal-Mart asked its 14,000 suppliers to switch over from the existing

Value Added Networks (VAN) EDI to web enabled EDI. VANs route and manage EDI

messages for their customers. By implementing web-EDI, Wal-Mart can save millions of dollars

in the form of license fees to the private VANs.

• RFID TECHNOLOGY (RADIO FREQUENCY IDENTIFICATION)

In efforts to implement new technologies to reduce costs and increase the efficiency, in

July 2003, Wal-Mart asked its top 100 suppliers to be RFID compliant by January, 2005. Wal-

Mart planned to replace bar-code technology with RFID technology. The company believed that

this replacement would reduce its supply chain management costs and enhance efficiency.

Because of the implementation of RFID, employees were no longer required to physically scan

the bar codes of goods entering the stores and distribution centers, saving labor cost and time.

Wal-Mart expected that RFID would reduce the instances of stock-outs at the stores.

Although Wal-Mart was optimistic about the benefits of RFID, analysts felt that it would impose

a heavy burden on its suppliers. To make themselves RFID compliant, the suppliers needed to

incur an estimated $20 Million. Of this, an estimated %50 would be spent on integrating the

system and making modifications in the supply chain software.

MANAGEING THE SUPPLY CHAIN PROCUREMENT AND DISTRIBUTION

Wal-Mart always emphasized the need to reduce its purchasing costs and offer the best

price to its customers. The company procured goods directly from manufacturers, bypassing all

intermediaries. Wal-Mart was a tough negotiator on prices and finalized a purchase deal only

when it was fully confident that the products being bought were not available elsewhere at a

lower price.

According to analysts, Wal-Mart was able to achieve a leadership status in the retail

industry because of its efficient supply chain management practices. By 1969, Walton had

established 18 Wal-Mart stores, reporting an annual sale of $44 million. In mid 1970s, Wal-Mart

acquired 16 Mohr-Value stores in Michigan and Illinois. By the late 1970s, the retail chain had

established a pharmacy, an auto service center, and several jewellery divisions.

In the 1980s, Wal-Mart continued to grow rapidly due to the huge customer demand in

small towns, where most of its stores were located. Commenting on the growth of Wal-Mart,

Walton said: "When we arrived in these small towns offering low prices every day, customer

satisfaction guaranteed, and hours that were realistic for the way people wanted to shop, we

passed right by that old variety store competition, with its 45 percent mark ups, limited selection

and limited hours."

Wal-Mart stores were located at a convenient place in a big warehouse-type building and

targeted customers who bought merchandise in bulk. Customers could buy goods at wholesale

prices by becoming members and paying a nominal membership fee. By 1984, there were 640

Wal-Mart stores in the US, generating sales of about $4.5 billion and accruing profit of over

$200 million.

Wal-Mart suffered a setback in 1992, when Walton died after a prolonged illness. But it

continued its impressive growth in the 1990s, focusing more on establishing its stores overseas.

In 1992, Wal-Mart expanded its operations in Mexico by entering into a joint venture with Cifra

Two years later, the company acquired 122 Woolco stores from Woolworth, Canada. By 1997,

Wal-Mart had become the largest volume discount retailer in Canada and Mexico. In 1997, Wal-

Mart acquired the 21-store German hypermarket chain, Wertkauf. Other international expansion

efforts included the purchase of Brazilian retailer Lojas Americans' 40 percent interest in their

joint venture, and the acquisition of four stores and additional sites in South Korea from Korea

Makro. In January 1999, Wal-Mart expanded its German operations by buying 74 stores of the

hypermarket chain, Interspar. The stores were acquired from Spar Handels AG, which owned

multiple retail formats and wholesale operations throughout Germany.

THE BENEFITS REAPED

Wal-Mart strongly believed and constantly emphasized on strengthening its relationships

with its customers, suppliers and employees. The company was very vigilant and sensed the

smallest of changes in store layouts and merchandising techniques to improve performance and

value for customers. The company made efforts to capitalize on every cost saving opportunity.

The savings on cost were always passed on to the consumers, thereby adding value at every stage

and process. Wal-Mart also enjoyed the benefits of low transportation costs since it had its own

transportation system which assisted Wal-Mart in delivering the goods to different stores within

(or sometimes less than) 48 hours.

REFERENCE

• Sivakumar.A, “Retail Marketing”, Excel Books Publication, 1st Edition, 2007

• Suja Nair, “Retail Management”, Himalaya Publishing House, 3rd Edition , 2008

• Swapna Pradhan, “Retailing Management”, TATA McGraw Hill Publication, 2nd Edition 9th

Reprint 2008

• http://www.icmrindia.org/casestudies/catalogue/Operations/OPER020.htm